Hoping to buy a new home this year? Well this means, you are likely to need a mortgage to help make this goal possible. If you have bad credit however, and worry that you may not be able to successfully obtain the financing you need, fortunately there are steps you can take to move closer to this reality.
While sometimes, it is a matter of not having a good enough credit score to be approved at all – other times it may be that you do want to improve your credit so that you can secure better loan terms, including lower interest rates.
Here are 3 steps you can take to get approved for a mortgage and improve your credit overall.
Step #1: Saving for a Down Payment
First and foremost, anyone looking to take out a mortgage can benefit from saving enough money to put towards a down payment. Effective February 2016, many potential home buyers are looking at paying at least 5% of the price of the house as a down payment. For example, if you are purchasing a home valued at $500 000 or so, then be prepared to pay $25 000 upfront for a down payment on your home.
Not only does saving for a home loan make you look more financially savvy to banks and lenders, since you have demonstrated your ability to save for a down payment, you can also reduce the size of the entire loan, ultimately paying less interest and a lower principal balance overall.
For these reasons, it is best to work hard at saving enough money for the down payment so that you can improve your chances of obtaining loan approval and moving closer to purchasing your home.
Step #2: Lowering your Debt
Another important piece of the puzzle that will also assist you with your mortgage approval, is to start paying off your debt. With a large volume of debt, it is highly likely that you will also have very poor credit. Of course a bad credit score makes it a lot more challenging to obtain a loan of any kind – and since mortgages are larger loans in general, this process can be even more difficult to navigate.
Therefore, it is also ideal to reduce your overall debt as in turn, this will enable your credit score to rise. Again, once creditors can see that you have a consistent record of paying off debt, instead of continuing to let is grow to an unmanageable level – this removes one large barrier that can prevent you from obtaining the loan you need.
Step #3: Understanding How Much Money You’ll Need
With that being said, you’ve already figured out how much you’ll need for a down payment and also now hopefully have an idea of how much your overall loan size will be moving forward. Well this is only the beginning as you will also need to understand how much money you’ll need to pay towards the home loan over time. Being aware of how much you’ll have to pay each month towards your loan is also extremely relevant in this situation.
Even if you can pay the upfront costs, you all need to be able to keep up with the payments each month for as long as it takes until you can pay off your mortgage. This is also where budgeting comes in and being able to ensure you can afford to pay your mortgage and not fall further into debt is of the upmost importance.
This third step helps you maintain a good credit score and continue demonstrating strong repayment history. If you have also been saving this money from the beginning, you can also make your application for mortgage approval seem a lot stronger, ultimately proving yourself to be a responsible borrower.
In the end, it is very important to take the necessary steps to ensure your success as a home loan borrower. If you do find you have bad credit and a high volume of debt, it will be even more critical that you start paying off your debt as well as saving for your down payment sooner rather than later.
In addition to saving and paying off debt, you also want to thinking ahead and accounting for all of the expenses you will need to pay towards your mortgage over the entirety of your its term.
As you can see, mortgage approval does require some financial legwork in order to make your goals of home ownership a reality – and by following some key steps you can get there.
